The discreet charm of ETF yet to shine on China-HK Stock Connect
Asset owners and managers are still in wait-and-see mode regarding exchange traded funds (ETFs) that will soon trade under the Stock Connect scheme between mainland China and Hong Kong, with few of the initial eligible funds yet to take their fancy.
Despite this, they believe their inclusion, starting next Monday (July 4), is a crucial step towards building important financial infrastructure which has the potential to unleash greater market vitality and liquidity.
“The inclusion of ETFs in Stock Connect marks a key step forward in further connecting Hong Kong and mainland financial markets," said Vincent Che, head of equity, Ping An of China Asset Management (Hong Kong).
"It creates a controllable and expandable channel for cross-boundary capital flows, and investors from both sides will benefit from a greater range of products and the boost to market liquidity,”
On Tuesday (June 28) night, Chinese mainland and Hong Kong regulators jointly announced the inclusion of ETFs into Stock Connect for both northbound and southbound trading which will be in effect from July 4 onwards.
By that time, both onshore and offshore retail and institutional investors will be able to trade ETFs listed on the bourses in Hong Kong, Shenzhen and Shanghai.
NOT INTERESTED YET
The total ETF products available under the Stock Connect number 87 initially. Among them, 83 are listed on the mainland.
They cover a wide constellation ranging from indices ETFs to thematic and sector-focused ones in healthcare, semiconductor, new energy, carbon neutrality, technology and consumption.
They need a level of average assets under management (AUM) at 1.5 billion yuan ($223.9 million) over the past six months to be traded by offshore investors.
However, asset owners AsianInvestor spoke to have so far showed little enthusiasm for participating in the market.
“We prefer active investment into Chinese equities. We feel like China is a market that active management can better create value as it is not so mature yet,” said a Hong Kong-based chief investment officer of an insurance company.
“It’s also hard to categorise ETFs within the strategic asset allocation… If I want to invest in Chinese equities, I can already do it through the current Stock Connect. I don’t really need ETFs,” the CIO told AsianInvestor, adding that the market cap for ETF products was currently too small for investors like them.
Echoing such views, another Hong Kong-based CIO of a regional life insurance company said their mandates were usually a few hundred million.
“If we buy or sell anything in the ETF market, the fluctuation we create is just too much.”
Even as hedging strategies, they believed that there were already so many available tools under derivatives to put ETFs into focus.
Nevertheless, the move is generally being viewed as a step in the right direction.
In China, 71% of ETFs AUM are dominated by equity funds. But there are also a well 25% of money market funds that focus on short-term debt investments which are popular among investors looking for a better yield than deposit rates. They are not yet available for offshore investors under the new scheme.
“China is much bigger in terms of money market funds, which actually I think would really attract northbound investors,” Sharnie Wong, Bloomberg Intelligence's senior industry analyst told AsianInvestor.
LIMIT REACH
Over to Hong Kong, only four ETFs - the Tracker Fund, HSCEI ETF, CSOP HS Tech and iShares Tech - are for trade by onshore Chinese investors after the inclusion.
Similarly, ETFs listed in Hong Kong must have an average AUM of over HK$1.7 billion ($216.6 million) over the past six months to be eligible for inclusion.
Currently, Hong Kong ETFs cover a wide range of asset classes, sectors, and geographies, including those tracked overseas and Asia Pacific stocks, global fixed income, and commodities, while mainland-listed ETFs are dominated by funds on domestic assets.
But when ETFs are included in Stock Connect next Monday, only equity ETFs will be available in the scheme, which accounts for 51% of the total HK$431 billion ($54.9 billion) of market capitalisation as of the end of March.
“Southbound demand could be muted as ETFs track overseas and non-equity assets remain off-limits to mainland investors,” Bloomberg Intelligence's Wong said.
The potential for overseas equity and non-equity focused ETFs in Hong Kong to be eligible on Stock Connect could better attract mainland investors, as they provided greater exposure than their onshore counterparts to Asia Pacific, US, European equities as well as fixed income and currency assets, Wong said.
“Although the scope of southbound ETFs may seem narrow at the moment, we are anticipating a wider scheme with many more eligible ETFs after they ‘test the waters’,” said Ping An’s Che.
“We hope the eligibility will be further relaxed so as to enable mainland investors to construct more diversified portfolios, and also enhance the breadth and depth of Hong Kong ETF market,” he said.